Balance of Trade

What is Balance of Trade? 

• The difference between the value of goods and services exported out of a country and the value of goods and services imported into the country is known as Balance of Trade or Trade Balance.

• In today’s world, all countries import some goods and services from other countries, and they also export certain other goods and services which are surplus in their country. If a country has a balance of trade deficit, it imports more than it exports, and if it has a balance of trade surplus, it exports more than it imports.

Balance of Trade Calculation

B.O.T = Net Earning on Exports - Net Payment made for Imports

Favorable & Unfavorable Balance of Trade (Surplus & Deficit)

The balance is said to be "favorable surplus" when the value of the exports exceeded that of  the imports, and "unfavorable deficit" when the value of the imports exceeded that of the exports. The balance of trade is the official term for net exports that makes up the balance of payments.

A balance of trade surplus is most favorable to domestic producers responsible for the 

exports. However, this is also likely to be unfavorable to domestic consumers of the exports who pay higher prices. Alternatively, a balance of trade deficit is most unfavorable to domestic producers in competition with the imports, but it can also be favorable to domestic consumers of the exports who pay lower prices.

Factors affecting the Balance of Trade

Factors that affect the Balance of Trade are as follows - 

• The cost of Production (Land, Labor, Capitals, Taxes, Incentives) in the exporting economy vis-a-vis those in the importing economy.

• The cost of availability of Raw materials, Intermediate goods and other inputs.

• Exchange Rate Movements.

• Different levels of Taxes or restrictions on trade.

• External or unavoidable factors like environmental, health or safety standards.

• The availability of adequate foreign exchange with which to pay for the imports.

• Price of goods manufactured at home in response to supply.

Why Trade Balance Matters - 

• The Trade balance is used to help economists and analysts understand the strength of a country's economy in relation to other countries.

• A country with a large trade deficit is essentially borrowing money to purchase goods and services, and a country with a large trade surplus is essentially lending money to deficit countries. In some cases, the trade balance correlates with the country's political stability because it is indicative of the level of foreign investment occurring there.

Market Leverage

What is Market Leverage? 

• Leverage is any technique that amplifies investor profits or losses. It describes use of borrowed money to magnify profit potential (financial leverage), but it can also describe the use of fixed assets to achieve the same goal (operating leverage). 

• Leverage is the ability to trade a large position (i.e. a large number of shares, or contracts) with only a small amount of trading capital (i.e. margin). 

• Leverage is the amount of debt used to finance a firm's assets. A firm with significantly more debt than equity is considered to be highly leveraged.

                                                         

Significance of Leverage - 

- Positive Significance

• Leverage helps both the investor and the company to invest. However, it comes with greater risk as well . If an investor uses leverage to make an investment and the investment moves against the investor, his losses can be much greater than it would've been if the investment had not been leveraged -leverage amplifies both profits and losses. In the business world, a company can use leverage to try to generate shareholder wealth, but if it fails to do so, the interest expense and credit risk of default destroys shareholder value.

Negative Significance - 

• Leverage is actually a very efficient use of trading capital, and is valued by professional traders because it allows them to trade larger positions (i.e. more contracts, or shares, etc.) with less trading capital. Leverage does not change the potential profit or loss that a trade can make. Rather, it reduces the amount of trading capital that must be used, thereby releasing trading capital for other trades. For example, a trader that wanted to buy a thousand shares of stock at Rs 500 per share would only require perhaps Rs 200,000 of trading capital, thereby leaving the remaining Rs 3,00,000 available for additional trades. This is the way that a professional trader looks at leverage, and is therefore the correct way.

• Leverage can be of high risk because it magnifies the potential profit or loss that a trade can make (e.g. a one can enter a trade using Rs 100,000 of trading capital, but has the potential to lose Rs 10,00,000 of trading capital). This is because that if a trader has Rs 100,000 of trading capital, he should not be able to lose more than Rs 100,000, and therefore should only be able to trade Rs 100,000 (e.g. by buying one thousand shares of stock at Rs 100 per share). Leverage would allow the same Rs 100,000 of trading capital to trade perhaps Rs 4,00,000 worth of stock (e.g. by buying four thousand shares of stock at Rs 100 per share), which would all be at risk. 

Conclusion

The bottom line is when it comes to leverage, unless you are a professional trader and your losses will be covered by your employer, leveraged investing should probably not be our primary investment strategy. If we are not a professional and you choose to use leverage, it makes sense not to invest more than you can afford to lose. Also, be sure to conduct careful research and make sensible decisions. 

Thank You !

Investors vs Traders

Are you an Investor or a Trader? 

Many people use the words "Trading" and "Investing" simultaneously & interchangeably when, in reality, they are two very different activities. While both traders and investors participate in the same marketplace i.e Share Market, they perform two very different tasks using very different strategies. For the market to operate smoothly there is the need for both the market participants


Who is an Investor? 

An investor is the market participant that the general public most often associates with the stock market. Investors are those who purchase shares of a company for the long term with the belief that the company has strong future prospects. Investors are basically concerned with two things - 

• Value - Investors must consider whether a company's shares represent a good value or not. For example, if two similar companies are trading at different earnings multiples, the lower one might be the better value because it suggests that the investor will need to pay less for the value of earnings when investing in Company A relative to what would be needed to gain exposure to the value of earnings in Company B.
• Success - Investors must measure the company's future success by looking at its financial strength through the different accounting books like Balance sheets, P/L Accounts and evaluating its future cash flows. 

Who Are the Major Investors?

There are many different investors that are active in the marketplace. In fact, the vast majority of the money that is at work in the markets belongs to investors. Major investors include:

• Investment Banks - Investment banks are the organizations that assist companies in going public and raising money. 

• Mutual Funds - Many individuals keep their money in mutual funds, which make long-term investments in companies that meet specific criteria. 
• Institutional Investors - These are large organizations or persons that hold large stakes in companies. Institutional investors often include company insiders, competitors hedging themselves and special opportunity investors. These people are very experienced and they carefully watch the balance sheets and other financial statements of the companies and analyse how are they conducting business.

• Insurance Houses - Insurance Houses are one of the largest investors. Eg: LIC

• Retail Investors - Retail investors are individuals that invest in the stock market for their personal accounts. A retail investor can be anyone like us. 

Common Characteristics of Investors

• Investors buy and hold and also for a long period of time.

• Investors enter long (or buying) positions.

• Investors focus on fundamental analysis.

• Investors are not concerned with short-term losses.

• Investors let profits accumulate and not just take out the profits quickly.

Who is a Trader?

Traders are market participants who purchase shares in a company with a focus on the market itself rather than the company's fundamentals. Markets that trade commodities lend themselves well to traders. After all, very few people purchase wheat because of its fundamental quality - they do so to take advantage of small price movements that occur as a result of supply and demand. Traders are basically concerned with the following - 

• Price Patterns - Traders will look at the price history data in an attempt to predict future price movements, which is known as Technical Analysis. Technical Analysis can be used for forecasting and thus minimize risk of monetary loss.
• Supply and Demand - Traders keep close watch on their trades intraday to see where the money is moving and why. Through the analysis, they keep a watchful eye on supply and demand of stocks

• Client Services - Market makers (broker -dealer firm) are actually hired by their clients to provide liquidity through rapid trading. 

Who Are the Major Traders?

Among the most popular types of Traders are - 

• Investment Banks - The shares that are not kept for long-term investment are sold. During the initial public offering process, investment banks are responsible for selling the company's stock in the open market through trading. 

• Proprietary Traders/Firms - Proprietary traders are hired by firms to make money through short-term trading. They use proprietary trading systems and other techniques in an attempt to make more money by compounding ( generating earnings from previous earnings) the short-term gains than can be made by long-term investing. 

Common Traits of Investors

• Traders enter a position to make money. 

• Traders will short sell a currency.

• Traders will hold for a short period of time.

• Traders use technical indicators and charts for Technical Analysis

• Traders cut losses.

• Traders take profits quickly.

Thank You !